February 25, 2014

Congressional Republicans may have come to a tacit agreement that they are done governing this year, but House Ways and Means Chairman Dave Camp isn't listening. Camp is preparing to unveil an ambitious tax-reform proposal tomorrow afternoon that has a number of Republican strategists concerned about putting new policies on the table during the election year. Inauspiciously, "[m]ore than a dozen skeptical lawmakers and senior aides told POLITICO they thought it was a strategic blunder to unveil a plan outlining which loopholes to cut, whose rates will be slashed and which sector of the economy will see higher taxes when there's little expectation the code will be reformed in 2014."

Nevertheless, Camp, who will have to relinquish his chairmanship at the end of this Congress due to term limits, is moving forward. Today, multiple reports have revealed a few critical parts of his plan. Here's a summary.

It condenses the seven current brackets to two, with rates at 10 percent and 25 percent.

Currently, the top tax rate is 39.6 percent on incomes more than $400,000 for individuals and $450,000 for joint filers. It increased as part of the "fiscal cliff" deal at the end of 2012. Camp would cut that substantially and eliminate many other tax brackets. It's not clear exactly which rates would apply at certain income levels.

It taxes investment income as ordinary income.

One long-sought liberal goal is to tax investment income as ordinary income. Currently, the capital gains tax rate is 20 percent, although taxes on some investments may be a few percentage points higher. While Camp's plan would accomplish that liberal goal, it also allows filers to exclude 40 percent of their investment income for tax purposes. Since the top tax rate is 25 percent (rising to a maximum of 35 percent—see below), investment income would only be taxed slightly higher under Camp's plan than under the current system—but now 40 percent will be excluded.

It closes tax loopholes and eliminates popular tax breaks.

This is an important section that we don't have much information on yet. To offset the base broadening of the tax code, Camp is going to eliminate a number of tax credits and deductions. Many of these are very popular with middle class Americans and businesses and eliminating them could create large political problems.

It adds a 10 percent tax surcharge to income over $411,000 for individuals and $464,000 for families.

This will effectively create a new 35 percent tax bracket, although Camp isn't calling it that. This surcharge would apply to more than just ordinary income though. It would also apply to other sources of income—such as employer-sponsored health insurance or tax-exempt bonds. This is another area where we'll know more once Camp reveals the exact details of his plan tomorrow.

According to the Washington Post, the Joint Committee on Taxation found that Camp's plan would be revenue neutral while keeping the tax code's progressivity relatively unchanged. Those with incomes between $500,000 and a million dollars would see the largest increases in their taxes over the long-term, but only 0.9 percent of filers would face the new 35 percent quasi-tax bracket. The Wall Street Journal reports that the plan would increase real GDP by as much as 1.5 percent to 1.6 percent per year over the next decade. The Journal also notes that if scored dynamically—meaning including extra revenue that tax reform could generate through increased economic growth—the plan could bring in up to $700 billion each year in additional revenue.

Camp had hoped to work with Max Baucus, the former chairman of the Senate Finance Committee and now ambassador to China, on tax reform this year. With Baucus's departure, the gavel has fallen to Ron Wyden, who is Finance's most liberal chair in decades, but is also well-known for his desire to cut big, bipartisan deals. Nevertheless, Camp faces an almost insurmountable challenge if he hopes to pass tax reform before his time as chairman is up. Just today, Senate Minority Leader Mitch McConnell said he sees no hope for tax reform this year. But even if Camp's plan doesn't get a vote this year, it could lay the groundwork for reform in years to come.